CM December 2020

EXCLUSIVE REPORT
STACKING
THE ODDS
Lenders are open to the risk of
fraudulent use of multiple Personal
Guarantees.
AUTHOR – Sean Feast FCICM
PERSONAL Guarantees (PGs)
are being used fraudulently by
small business owners to take
out multiple loans without any
chance of those loans ever being
paid back.
And Credit Reference Agencies (CRAs) who
have been made aware of the practice and
could solve the problem simply by creating a
new PG database are so far failing to act.
The news follows a review of loans agreed
by several different lenders which have
since defaulted and are now owned by the
commercial debt solutions business, Azzurro
Associates.
Analysts within Azzurro quickly identified
that the same PGs were being used to secure
new loans from different lenders sometimes
only days after a previous loan had defaulted
and without the new lender being aware.
Andrew Birkwood, Chief Executive of
Azzurro Associates, has evidence of one case
where the owner of a gift shop defaulted on a
loan on 9 November with one lender, only to
take out another loan with a different lender
on 22 November using the exact same Personal
Guarantee. He went bust owing more than
£50,000: “Had the second lender been aware
that the busines owner had been using the
same PG, they would not have agreed to the
loan,” he says.
“The problem is that lenders would have no
way of knowing, and the CRAs, who could do
something about it, seem reluctant to listen.”
THE CREDIT ECOSYSTEM
CRAs are fundamental to the credit ecosystem.
Their databases (CAIS – Experian, SHARE
– TransUnion, Insight – Equifax), and the
framework around accessing and submitting
data to them, enable a fair lending construct
allowing lenders to confidently offer financial
products, and borrowers to safely secure credit.
Previously, CRAs held consumer databases
that included commercial transactions for sole
traders, SMEs and small partnerships. In 1999,
the Information Commissioners Office (ICO)
instructed the CRAs to separate the ‘personal’
and ‘business’ data for consumers which has
since led to the maintenance of two discrete
databases: Consumer and Commercial.
In the instance of PG-backed lending for
commercial loans, there is no CRA database for
reporting the commitment by the individual
PG, or the post-default liability. The credit
contract is a commercial agreement, and thus
it cannot be held within the Consumer CRA
database. And currently, no personal data may
be held within the Commercial CRA database.
“This leads to several negative consequences
for both the lender and the wider credit
market, which are a material risk to sustainable
commercial lending,” Andrew adds.
For SMEs, particularly recently incorporated
companies, finance is not always easily
available with sole liability on the company.
Commercial lenders commonly require a PG –
usually a company director – to offer increased
security against the repayment of the loan. The
PG will undergo a credit score assessment, as
part of the underwriting of the loan.
“With no Personal Guarantor bureau, the
facility for lenders to report the position of
personal guarantees does not exist,” Andrew
continues.
“With PGs, the guarantee is not called upon
by the creditor until the company defaults on
payment. So there isn’t a default as such by the
PG. The company defaults, and at that point the
creditor can call on the PG for payment when
the company has failed to pay. In this case
liability for the debt shifts to the PG.”
In the current hiatus created by the ICO there
is no record of an individual guaranteeing a
company debt; there is no record of whether that
individual is currently liable for the guaranteed
debt due to a default by the borrowing entity;
and there is no record of a PGs payment
behaviour in relation to a defaulted debt.
PG ‘STACKING’
This absence of data presents a challenge to
commercial lenders looking to offer credit
backed by a PG. A lender will underwrite the
loan based on factors including the completion
of an application form and a credit check
on any guarantor(s). The lender at this point
is only privy to the personal credit file of the
Advancing the credit profession / www.cicm.com / December 2020 / PAGE 21
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